Japan Is Enacting Radical Monetary Easing After 15 Years Of Deflation

JAPAN’s public is finally getting the message that the central bank is determined to beat deflation. The weekend after Haruhiko Kuroda, the Bank of Japan’s new governor, announced radical monetary-easing measures, a newly-formed girl band with the catchy name of "Business on the streets of Japan" took to a Tokyo stage. The artists, a group of high-school and university students, pledged to remove their skirts if the Nikkei, Japan’s benchmark share index, hit 13,000 after the central bank’s announcement. Both the Nikkei and the band delivered (see chart).

The scale of the BoJ’s monetary actions marks a decisive break with the past. During nearly 15 years of deflation the bank was repeatedly criticised for failing to pursue quantitative easing with the conviction and scale that would persuade consumers and markets that inflation would return. After taking office as prime minister last year, Shinzo Abe talked of curbing its independence if it did not act. In January the bank grudgingly set a 2% inflation target but seemed to put the onus on the government to get there, mainly through structural reforms designed to boost growth.

On April 4th Mr Abe got what he wanted, and more. Mr Kuroda promised to double Japan’s monetary base as well as its holdings of Japanese government bonds. The maturity of the bonds it purchases will increase from an average of about three to seven years. To make its intentions clear the bank merged its quantitative-easing programme into its regular operations. This time there was no need to read any tea leaves: the BoJ simply said it "will achieve" inflation of 2% in about two years’ time.

The bank’s previous governor, Masaaki Shirakawa, shied away from the risks associated with such monetary easing. One of them is that rising inflation and higher interest rates will push the burden of servicing Japan’s giant public-sector debt, some 240% of GDP, to perilous levels. Another is that wages will not rise to match inflation in the price of goods and services, meaning a squeeze on households. So far, some big companies, such as Lawson, a chain of convenience stores, have announced salary increases for employees but small to medium-sized firms, which account for the bulk of employment, broadly have not.

The central bank’s moves will act to soften the effect of the structural reform that Mr Abe’s government must now deliver, says Masaaki Kanno, a former BoJ official who is now chief Japan economist for J.P. Morgan in Tokyo. The first step on that road was to announce Japan’s intention to join talks on the Trans-Pacific Partnership, a free-trade agreement. Last week the government unveiled an ambitious plan to reform the power sector, by splitting electricity firms’ generating arms from their transmission arms and allowing competition in retail sales of electricity.

Mr Abe has set up a series of committees to examine reform in areas such as labour policy, health care and agriculture. These will report in June, with full details to come after an upper-house election in July, which the prime minister’s ruling block is expected to win. As Robert Feldman of Morgan Stanley notes, the process remains "complex and vulnerable to interference by vested interests". Now, in other words, for the hard part.